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Monday, June 11, 2012

Switzerland's "stealth" fiscal stimulus to Europe

Ever wonder where Germany gets the endless money for bailouts?

This may answer that question.

In its ongoing efforts to peg the Swiss franc to the euro at 1.2, the Swiss National Bank has been buying billions of euro (around 150 billion since last September). These euro have been used by the SNB to buy European bonds (mostly German), which explains the collapse in German bond yields. The bond purchases are a form of de-facto “fiscal stimulus” to Germany and the rest of the Eurozone (when Germany extends credit or otherwise “lends” to other member states).

So the people of Spain should thank the Swiss for their largesse. The ECB should do the same, as it can sit back and do nothing thanks to the SNB’s currency operations.

Who gets hosed? The people of Switzerland, who see their currency weaker than it otherwise would be, which reduces their real terms of trade. In other words, Switzerland gets nothing in real terms out of this deal. Europe gets everything.

Moody's has effected the German and Australian banks massively i must say...i just read another article in this relation...i would suggest a must to read... http://half-bridge.blogspot.com/2012/06/moodys-cuts-rating-of-german-and.html

Wherever there is demand for something that only one country can produce, that country ought to be able to profit from that demand. Switzerland needs to ensure that the real or “inflation adjusted” rate of interest on its national debt is negative. That way it profits from those wanting to hold Swiss Francs.

The UK has been doing this for the last two years, while in the case of the US, the real rate of interest on US government debt has averaged about zero I think.

The real interest on its national debt is negative. And 1.20 CHF/EUR is already way beyond PPP, which is considered to be somewhere around 1.50 CHF/EUR. So any uniqueness of Swiss exports and its tourism industry is already being tested at the 1.20 mark. Anything below that would be extremely destructive to many sectors and thus to employment. Guesses are that with a full float the xchange rate would sink to 1/1 or below.

In any case, it isn't just a matter of offsetting saving desires. It's long-term structural and industrial policy and, with it, employment that's at stake.

The relentless 'float mantra' is beginning to sound rather Thatcherite. But unlike the UK, Switzerland actually still has sectors other than finance to defend. And an unemployment rate of below 3%... Buying more German cars isn't the main concern at the moment. A gradual adjustment to an impoverished Europe may wel be, with an emphasis on 'gradual'.

Right. It was Hayek who provided the political-economic underpinning (The Road to Serfdom) and Friedmann who provided the economic-financial rationale in terms of neoliberal-monetarist economic theory that was designed to replace Keynesian fiscalism aka "socialism." New Keynesians responded by neo-liberalizing Old Keynesianism. Friedman's Freedom to Choose is complementary to The Road to Serfdom, replacing the road to serfdom (Keynesianism) with the path to freedom (Libertarianism).

Economic liberalism — free markets, free trade and free capital flow — sounds great as a political slogan, but adoption of these principles has inevitably led to problems that have resulted in governments' reversing course in the looming emergence of danger or onset of crisis. There is no invisible hand, but there is a fickle finger of fate.

MMT economists like Randy Wray say that governments have to watch both domestic price change and exchange rate fluctuation. Presumably, that means government has to intervene and take steps to correct imbalances before they result in economic distortion.

In Freedom to Choose, Friedman equates genuine democracy with individual freedom with market fundamentalism, which results in maximum prosperity and the most moral system, too.

Nothing could be further from the truth. Marke fundamentalism firmly establishes the privilege of wealth, most of which comes from economic rent, and provides for the transfer of this privilege by birthright, i.e., inheritance. It's a recipe for plutocratic oligarchy, based on the false premise that everyone has a more or less equal shot at the top.

Might as well be arguing for the lottery, in light of the facts about social mobility. It's a con for suckers, just like Ayn Rand, but a whole lot more clever.

All governments influence their currencies to keep it within the desired band. What do you think all the complaining to the US to "maintain a strong dollar" is about. The US has not been doing that and letting the floor drop to gain export advantage.

Oil price due to USD devaluation? No problem. The Saudis have an arrangement with the US to buy US tsys and weapons.

I think the point is that swings in exchange rates and current accout imbalances are not necessarily directly linked. Like the US, certain countries are in the situation where they can run permanent current account deficits without being more susceptible to large swings in their exchange rate because of it.

I don't think Switzerland is such a country because, while there might theoretically be a way for Switzerland to bring itself into such a position, it would neccessitate a large 'redomestication' of its output. There's no way in hell we're going to use all the pharmaceuticals we produce, wear all the watches we make and have our banks fleece our own population instead of foreign governments.

It doesn't add up and just isn't a realistic scenario for a small country with high mountains and absolutely no natural resources. MMT hardcore float is a special case.

It's not the current account flow as such, but rather large swings in exchange rates that are disruptive to output and thus employment.

The question remains whether filling in demand leakage resulting from current account deficits will lead to a: just even larger current account imbalance or b: also larger swings in exchange rates.

MMT claims there is no link from a to b. Thus > Imbalance? What imbalance?

And reconnecting to Switzerland, it is certainly so, that fx swings are more disruptive to an economy the more internationally linked it is. Thus its reaction to the large capital flows coming in from the EU zone. This must be filed under managing exogenously created exchange rate swings, not under managing domestic demand.